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Wildcat Capital Issues Letter to Board of Sorrento Therapeutics

NEW YORK, May 6, 2016 /PRNewswire/ -- Wildcat Capital Management LLC ("Wildcat"), whose clients hold an ownership stake of 6.5% of the common stock of Sorrento Therapeutics, Inc. (NASDAQ: SRNE) (the "Company" or "Sorrento"), today sent a letter to the Company's Board of Directors (the "Board") urging the Board to take specific actions to remedy the ongoing destruction of significant shareholder value. In particular, the letter calls for the Board to immediately terminate and replace Dr. Henry Ji as Chief Executive Officer and to stop recently announced financing transactions to avoid further dilution to the existing shareholders. The letter also calls for the appointment of three Wildcat nominees to the Board to lead a special committee authorized to initiate a sales process for the Company.

The letter outlines in detail several serious issues that reveal that Dr. Ji, Sorrento's management team, and its Board have engaged in egregious and improper self-dealing and are squandering the Company's assets including, among other things:

  1. The Company has repeatedly transferred assets to newly created subsidiaries and then granted stock options and warrants to acquire significant amounts of stock in those subsidiaries at nominal prices to Dr. Ji, other executives, and non-employee Directors.
  2. The Company has wasted money and time on numerous imprudent transactions that have destroyed shareholder value.
  3. The Company has repeatedly demonstrated an utter lack of fiscal and operational discipline.
  4. The Company has entered into inappropriate financing transactions, including the pending highly dilutive sale of shares in which it effectively granted a free option to new investors to acquire 45% of the Company at a price that is near the 52-week low for the Company's shares.

The letter calls upon the Sorrento Board of Directors to meet Wildcat's demands to promptly take action to protect and maximize shareholder value, or to immediately resign and allow another slate of directors to effect such actions.

The full text of the letter is below:

May 5, 2016

By Email and FedEx

Board of Directors
c/o Sorrento Therapeutics, Inc.
9380 Judicial Drive, San Diego, CA 92121
Attn: Corporate Secretary

Dear Directors:

I write on behalf of Wildcat Liquid Alpha, LLC ("WLA") and Bonderman Family Limited Partnership ("BFLP" and, together with WLA, the "Wildcat Shareholders") who collectively own 2,499,936 shares of common stock of Sorrento Therapeutics, Inc. ("Sorrento" or the "Company"). The Wildcat Shareholders believe that the Company's Chief Executive Officer ("CEO"), Dr. Henry Ji, has consistently acted in a manner that is not in the best interests of shareholders and has destroyed significant shareholder value. Further, the Wildcat Shareholders believe that the Company's Board of Directors (the "Board") has failed to act in the best interests of shareholders, and that the Directors have breached their fiduciary duties.

As set forth more fully herein, three serious issues have come to light that expose the failure of Dr. Ji and the Board to properly manage the Company, as well as the intentional waste and diversion of Company assets. First, over the past several months, the Company has been acquiring and/or transferring assets to newly created wholly-owned subsidiaries and then issuing significant amounts of those subsidiaries' shares back to the Company's executive officers and Directors through significant grants of options, and warrants for Class B super-voting stock, all exercisable for nominal consideration, thereby engineering a personal benefit for such officers and Directors at the direct expense of the Company and its shareholders. Second, the Company has entered into and the Board has approved numerous imprudent transactions, including (i) the licensing of valuable assets to third parties (including newly created joint ventures) pursuant to arrangements where the Company has lost the ability to control the development and monetization of those assets; and (ii) the investment of significant capital to acquire minority interests in companies and joint ventures where the Company has little or no control or influence, in effect turning the Company into a passive investor in entities controlled by others. Third, the Company has demonstrated a complete inability to exercise financial discipline, and has repeatedly entered into transactions in which it has acquired scientific assets without the financial ability to either pay for those assets or further develop them to a stage where they can be monetized. As a result, to its detriment, the Company has been forced to renegotiate its obligations on several occasions and to enter into bargain sales of valuable assets. Even further, the Company has entered into inappropriate financing transactions without the proper consideration of less costly alternatives, including the massively dilutive financing that the Company recently announced in which it effectively granted a free option to new investors to acquire 45% of the Company at a price that is near the 52-week low for the Company's shares.

Through the improper conduct of Dr. Ji and the Board, the assets of the Company -- and, therefore, of its shareholders -- are being looted, and the value of the remaining assets dramatically diminished. Accordingly, we call upon the Board to take immediate steps to protect and maximize shareholder value. In addition, we request that the Board immediately terminate Dr. Ji as CEO or, if it refuses to do so, to resign and allow another slate of directors to do so.

I. Improper Option and Warrant Grants by Subsidiaries to
Sorrento Executives and Board Members

We have recently learned of an egregious series of transactions that reflect blatant conflicts-of-interest and self-dealing by Dr. Ji and other Company executive officers, endorsed and abetted by the Board. In short, the Company has repeatedly transferred assets to newly created subsidiaries and then granted stock options to acquire significant amounts of stock at nominal prices to Dr. Ji, other executives, and non-employee Directors of the Company. Compounding that misconduct, Dr. Ji has also taken for himself warrants to acquire extraordinary numbers of shares that have 10 votes per share -- all for nominal consideration. These equity stakes are in addition to the equity stakes in Sorrento already granted to Dr. Ji and the other members of management and the Board, effectively "double dipping" at the direct expense of the Company and its shareholders. In addition, these grants represent uncrossed, virtually free options in each of the subsidiaries, creating a situation where Dr. Ji and the other recipients win even if the Company and its other shareholders do not.1

As disclosed in Item 13 of the Company's Amendment No. 1 dated April 29, 2016 ("Amendment No. 1") to its Annual Report on Form 10-K,2 five of Sorrento's subsidiaries have issued stock options to certain Company executive officers and unidentified non-employee members of the Board. The five Sorrento subsidiaries that issued such stock options are TNK Therapeutics, Inc. ("TNK"), LA Cell, Inc. ("LA Cell"), Sorrento Biologics, Inc. ("Biologics"), Concortis Biosystems, Corp. ("CBC"), and Scintilla Pharmaceuticals, Inc. ("Scintilla"). In addition to Dr. Ji, other Company executive officers that received such stock options are George Ng (Executive Vice President, Chief Administrative Officer, and Chief Legal Officer), and Jeffrey Su (Executive Vice President and Chief Operating Officer).

In a telling sign of self-dealing, Dr. Ji is the President and CEO of four of the five subsidiaries (TNK, LA Cell, CBC, and Scintilla) that issued the stock options to him, Messrs. Ng and Su, and the unidentified non-employee members of the Board. Each of the five subsidiaries have also issued warrants to Dr. Ji to purchase class B common stock that have 10-to-1 voting rights, thus giving Dr. Ji "super" voting rights.

Through this scheme, the equity value in the Company's subsidiaries has literally been ripped away from the Company's shareholders and given instead to Company insiders, including the individual Directors. By any standard, this scheme constitutes various breaches of the fiduciary duties owed to the Company's shareholders by the Company's Board, its Directors, and its officers. The specifics of the scheme as identified in Amendment No. 1 are as follows:

  • In May 2015, TNK granted options to purchase 1,000,000, 300,000, and 200,000 shares of common stock to Messrs. Ji, Ng, and Su, respectively, at an initial exercise price of $0.01 per share. TNK also granted a warrant to Dr. Ji to purchase 9,500,000 shares of TNK class B common stock that have 10 to 1 voting rights. Additionally, TNK granted options to purchase an aggregate of approximately 700,000 shares of common stock to certain...

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